12/05/2012 04:33 pm ET Updated Feb 04, 2013

Illinois Pension Reform: State Lawmakers Unveil New Plan To Fix Underfunded System

By Joanne von Alroth

SPRINGFIELD, Ill, Dec 5 (Reuters) - A bipartisan group of Illinois lawmakers on Wednesday unveiled a plan to fix the state's underfunded pension system by boosting contributions from public sector workers, raising retirement ages and limiting cost-of-living increases for retirees.

The legislative framework, aimed at fully funding the state's pension system within 30 years, drew criticism from labor unions that said it relied too heavily on current and retired public employees to pay for balancing the books. The Senate president said it may violate the state constitution.

Under the plan, the responsibility for the state's biggest fund, Teachers' Retirement System, along with pensions for higher education workers, would shift gradually to local school districts, universities and colleges at 0.5 percent of payroll annually. It has 21 cosponsors.

State Representative Elaine Nekritz, the Democrats' point-person on pensions, conceded that the bill is not perfect.

"We are all troubled by something in this bill," she said at a news conference. "But the greater good must be our goal."

State Representative David Harris, a Republican, said the problem goes beyond politics.

"We have to face this problem before it ruins us financially," Harris said, adding that the legislation "moves the discussion forward in a positive way."

Years of skipping or skimping on pension payments left Illinois with an unfunded liability of $96.8 billion at the end of fiscal 2012, a sharp jump from $83 billion in the prior fiscal year. The funded ratio, which was already the lowest among states, sank to 39 percent from 43.3 percent. A funding level of 80 percent is considered healthy.

The burgeoning liability and elusive political consensus on reforms have contributed to credit rating downgrades of Illinois.

To ensure the state keeps up with payments for its five pension funds, the legislation would allow the funds to enforce those payments through the courts. As Illinois pension bonds mature, revenue that had been used for debt service payments, would be tapped to pay down the unfunded liability beginning with $693.5 million in fiscal 2016, growing to an additional $1.1 billion a year starting in fiscal 2034.

Democratic Governor Pat Quinn, who has warned that pension payments are crowding out funding for essential services such as education, called the new plan a "welcome contribution."

Senate President John Cullerton, a Democrat, questioned whether the legislation could infringe on state constitutional protections of public pensions.

"The larger proposal appears to impose unilateral pension reductions without offering voluntary acceptance by participants," his office said in a statement.

We Are One Illinois, a coalition of public employee labor unions, said a preliminary review "suggests there are significant problems" to work through in the bill.

The coalition said in a statement ... "like its predecessors, this proposal essentially balances the pension debt on the backs of teachers, police officers, nurses, caregivers, and other public servants both active and retired."

Steve Brown, a spokesman for Democratic House Speaker Michael Madigan, said pension reform will be on the agenda when the legislature returns in January.

"The speaker has been and will be supportive of comprehensive pension reform," he said, adding the new legislation "certainly fits that bill."